Drawdowns – Omen or Opportunity?

Originally published in the Brandywine Asset Management Monthly Report.

Over the past three months, Brandywine’s Symphony Program suffered its largest drawdown, -11.36%, since the start of trading in July 2011. Drawdowns are a natural part of trading and Brandywine’s Symphony Program is no exception. But for most investors, they provoke discomfort and prompt a series of questions. We know this because over our decades of trading (and yes, prior drawdowns), we have fielded a number of questions, as well as asked a number of them ourselves. In this report we’ll present some of those questions and discuss the current drawdown, as well as future expectations, in the form of a Q&A.

What caused the loss over the past three months?
Brandywine’s Symphony Program incorporates a variety of trading strategies, each based on a sound, logical return driver designed to produce a positive return over time. And since inception these trading strategies, in the aggregate, have been solidly profitable. But during the current drawdown period, September through November, a disproportionate number of those strategies incurred losses while very few produced sizable gains. Specifically, a majority of the losses were caused by fundamentally-based strategies and those we describe as directional arbitrage or that employ intermarket relationships. In our due diligence questionnaire we prepared three years ago, we identified rapid downtrends in markets as being the worst environment for those strategies. With crude oil dropping more than 40% in an uninterrupted downtrend (and 10% alone on the last day of November), and other commodities such as silver, cotton and currencies [such as the Australian dollar] mired in 10% to 30% drawdowns, those strategies hit their “perfect storm” over the past few months.

Other futures traders had some of their best performance in years, why didn’t Brandywine?
Since the inception of Brandywine’s Symphony Program in 2011 we have consistently stressed that Brandywine’s unique approach to research and trading would produce returns that were non-correlated to all other investment indexes and investment managers, including CTAs. This non-correlation was exhibited in full force in November and over the past three months. After lagging Brandywine’s performance for the three years leading up to the start of our drawdown in September, the BTOP 50 and Newedge CTA indexes each rallied approximately 8%. Despite the strong performance differential, Brandywine has still outperformed those indexes since inception. Even better, because of Brandywine’s non-correlation to those indexes, adding Brandywine to a portfolio that contains CTAs results in both increased returns and reduced risk (yes, even measuring Brandywine’s performance from the low point of the current drawdown).

What are your expectations going forward?
When Brandywine suffered a drawdown in mid-2013, we stressed in our monthly report our belief that it was an excellent time to consider investing or adding to an investment with Brandywine. That belief turned out to be prescient. In the 12 months following the Brandywine Symphony Program’s drawdown in 2013, the Program produced a solid positive return of +15.83% and the aggressively-trade Brandywine Symphony Preferred gained a substantial +65.33%.

While prudence and regulations require us to state that PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE, history leads us to expect similar strong returns going forward today. This expectation is based on our historical testing and actual trading performance. In fact, in the 12 instances (both tested and actual) where Brandywine’s Symphony Program fell by more than 8% (on a gross, end-of-day basis), the following 12 month return has averaged more than 18%. Of course, Brandywine Symphony Preferred, trading at three times standard risk, would produce substantially greater returns; although as we must also state THERE IS THE RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING WITH BRANDYWINE.

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